Research: Vacancy levels likely to increase
Global and local trends affecting commercial property.
Sunday, March 7th 1999, 12:00AM
As the millennium approaches, companies are becoming increasingly aware of and concerned about the impact of technology and issues such as Y2K which will affect their businesses. The commercial property industry is not immune to these changes and there are a number of other trends which will affect the property industry both on a global and a local level.
1. Cost reduction drive
Businesses today are more focussed on their bottom line than ever and companies are looking to their office accommodation to provide cost effective and efficient use of space. In a recent paper prepared by Colliers Jardine 'The changing face of Auckland offices' an analysis was compiled looking at commercial space per person by year of fitout. The analysis indicated that the average space usage in 1994 was 28.27 m2 and has subsequently fallen to its present level of 17.81 m2. When looking at the larger occupiers such as legal and accounting firms there is an ever increasing need for larger office floors that provide open plan environments and improved office efficiencies.
2. Outsourcing
Companies continue to outsource areas of their businesses as they strive for greater cost efficiencies by using fewer and bigger processing centres. This results in an overall reduction in their space requirements however this, to some extent, is offset by expansion of industries that provide these services.
3 Use of technology
Technology has impacted the way in which business is conducted and has also influenced the property industry with building designs having to cater for the growing use of computers. This has also necessitated the need for back up generators to supply uninterrupted power supply in the event of power cuts and placed increasing demand on air-conditioning systems to allow for increasing workloads. False floors, fibre optic cabling, larger riser ducts, multiple telecommunication network provider rooms and roof cable access are all modern requirements which are needed in modern commercial buildings to enable tenants to establish state of the art technology, satellite links and teleconferencing for their communications platforms. Tenants today are taking much more advice and being cautious in their selection of new premises, both from a financial and service orientated perspective.
4. Year 2000 compliance
With the millennium rapidly approaching landlords have been looking at their commercial properties to ensure that their building services will be compliant in the year 2000. The main concern for landlords has been with computerised equipment and electronic devices containing time clocks that may be defective after 1999. In the majority of cases the effect will be minimal. However, the larger office buildings are more likely to be vulnerable particularly where they contain sophisticated lifting, air-conditioning and security systems. This has provided additional costs to the landlords and in some instances has brought forward their programmed capital works.
5. Mergers and acquisitions
The growth of merger and acquisitions in the international arena has led to an amalgamation of businesses and the development of teams within companies which require larger floor plates to enable an open plan environment where communication is vital to the success of their business. Once again, companies are driven by the bottom line and will look for cost savings through redundancies and by placing larger staff numbers into smaller areas.
6. North/West drift
The increase in mergers and acquisitions amongst Australasian entities has created a local trend which is perhaps more evident in Wellington than the Auckland market. The amalgamation of financial services companies has placed pressure on the Wellington market as businesses look to locate their operations to Auckland. To a lesser degree, this trend is also evident in Auckland where businesses are being drawn to Melbourne. The net effect of this trend over the longer term will produce higher vacancy levels in this sector particularly in Wellington.
Implications for the commercial property industry in New Zealand
Without the sustained and substantial net absorption of office space within the Wellington and Auckland CBDs there will be an increase in vacancy levels, particularly within the lower grade stock.
All markets, particularly the office market, are currently experiencing pronounced stratification. The strong get stronger. Office buildings providing the best services, which can accommodate the latest technology and accommodate a higher density of occupation will attract occupiers despite having higher rents per square metre. Buildings which are in the middle of the A and C grades will require capital expenditure to ensure that they are providing acceptable accommodation.
Unfortunately, the same cannot be said for the lower grade accommodation and landlords will need to become more innovative to retain tenants in the future with the threat of higher market vacancy levels.
Grant Unsworth is the property investment manager at New Zealand Guardian Trust.
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